How to make big profits from small stakes
Not long ago, spread betting was the preserve of City investors and hedge-fund whiz kids. But now retail investors are growing increasingly interested in this investment strategy, as it offers round-the-clock, low-cost and tax-free access to a wide range of markets and asset classes.
Around 400,000 people have opened a spread betting account, according to City University’s Cass Business School, and at the current rate of growth the figure could eclipse one million in five years.
Spread betting: attractions
The key attraction of spread betting, as David Budworth notes in The Sunday Times, is that investors can bet cheaply on the rise or fall of an asset without owning it. Unlike with normal share trades, there is no commission to be paid, no stamp duty on dealing and no capital gains tax on winnings (although losses cannot be offset against tax).
What’s more, you can get substantial exposure to the market with only a small deposit; this margin is typically around 10%-20% of the value of your bet. Such gearing means you can rake in a large sum from a small stake – but it also magnifies potential losses.
Spread betting: how it works
A spread betting firm predicts where a share or a market will stand at a certain point in the future by quoting a spread, the range between the high and low estimates. Investors then bet on those prices, buying at the high end of the spread if they are bullish, or selling at the low end if expecting a slide.
Say a spread-betting firm is quoting a spread of 5,810-5,820 for the level of the FTSE 100 in December. If you think it will be higher than that, you can bet £10 a point above 5,820; conversely, if you expect a fall, you can bet that amount below 5,810. If the index rises to 5,840, closing the bet (which can be done anytime before expiry) would earn you £200 (£10 times 20 points). But if you’d initially made a down bet, you would lose £300 (£10 times 30 points, the difference between 5,810 and 5,840). In short, the more the market moves in your direction, the more you stand to gain, but the reverse is also true.
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Spread betting: stop-losses
To limit potential losses, many traders request a stop-loss to close a bet automatically if it moves against them. But beware, these aren’t foolproof because a share price or index can jump beyond your stop-loss level and the firm may not have a chance to fulfil your order. You can guard against this by using a guaranteed stop-loss. This costs extra, usually in the form of a wider spread, as this is where the betting company makes its money.
A dry run is a good idea for novices: some firms, such as Capital Spreads and City Index, offer demonstration accounts. And investors can keep a lid on losses with small stakes; at Finspreads, for instance, you can bet for just 50p a point.
Spread betting: how to invest
Spread betting offers access to markets that have hitherto been virtually inaccessible for small investors, including foreign exchange and commodities (ranging from precious and base metals to agricultural raw materials). Investors can play foreign shares with sterling bets, thus negating currency risk, and also take a view on both national and international indices and sectors.
But there’s no need to limit yourself to financial markets. There are countless opportunities for sports fans, from American football to greyhound racing, while other popular bets in the past have included the number of times Gordon Brown would mention the word ‘prudence’ in a Budget speech. If you can attach a number to it, the chances are you can spread bet on it.
Financial spread-betting firms include IG Index, City Index, Finspreads, Cantor, Capital Spreads and Tradindex.
